Retail funds regulated under the undertakings for collective investment in transferable securities (Ucits) regime--a framework that facilitates the cross-border sale of mutual funds across the EU--could be allowed to allocate up to 10% of their portfolios to alternative investments, under new proposals from the European Securities and Markets Authority (Esma), the EU’s financial markets regulator and supervisor.
Esma recommended these changes in its technical advice to the European Commission, published on 26 June 2025 as part of the review of the Ucits Eligible Assets Directive (EAD). The EAD sets out which asset classes Ucits funds, widely available to retail investors across the EU, are permitted to invest in.
Central to Esma’s proposal is the application of a mandatory “look-through” approach to at least 90% of a Ucits fund’s portfolio. This would require fund managers to fully identify and assess the underlying assets, ensuring compliance with rules on liquidity, transparency and valuation.
However, the remaining 10% could be invested in more opaque or less liquid asset classes, such as private equity, real estate or infrastructure, subject to regulatory safeguards. Esma stated this limited flexibility would support better risk diversification and the potential for improved returns through exposure to uncorrelated assets.
Harmonisation and investor protection
The advice follows a comprehensive assessment of how the EAD is currently applied across EU member states. Esma found inconsistencies in interpretation and implementation, prompting calls for clearer definitions of eligible assets and greater alignment with other EU financial regulations.
Verena Ross, chair of Esma, said: “The policy proposals set out by Esma are based on a comprehensive data collection exercise, and will help foster regulatory harmonisation and supervisory convergence for Ucits management companies operating and marketing Ucits on a cross-border basis.”
Beyond the Ucits framework, Esma also highlighted the potential for improving retail investor access to EU alternative investment funds (AIFs). It suggested harmonising national rules on cross-border marketing and proposed the possible creation of a retail AIF product.
The European Commission is expected to consider Esma’s advice as part of its review of the Ucits directive. If adopted, the proposals would represent a significant change to longstanding investment restrictions on retail funds in the EU, while maintaining the 90% look-through rule to uphold investor protection principles.
